The cost of debt capital is an important ratio to discuss and help clients understand because if their profit margins are good and if a company’s overall debt is not too high then companies can use it to their advantage. In my experience, helping clients understand this concept is important because it teaches clients that they can increase sales and revenue by incurring smart debt. For example, if a client’s cost of debt capital is 6%, but their profit margin is 12%, then clients can earn an extra 6% in profits by incurring more debt. It is important for clients not to incur too much debt, so their debt to equity ratio must be taken into consideration.
Tell me why it is important to monitor a client’s debt to equity ratio? What happens when there is too much debt?